Charge Card, Credit Card, Debit Card: Which One Is Right For You

Charge Card, Credit Card, Debit Card – Which One Is Right
for You?

Charge cards, credit cards, and debit cards may
look alike, but they offer different services and benefits. Learn the
basics of each card and determine which is best for you.

There are many variations when it comes to those
little plastic cards. The common feature is the convenience they
provide. But are you aware of the unique differences? Understanding
how different cards work will help you use them smarter.

What Is a Credit Card?

A credit card is a means of buying goods and services
on credit. Credit cards are issued to you based on your income and
information on your credit
report. When you use a credit card, you are borrowing money
against a line of credit. You pay it back with interest each month if
you haven't paid the balance in full by the payment due date. If you
do pay your balance in full before the grace period expires (usually
about 25 days), you won't be charged interest.

VISA, MasterCard, American Express, and Discover
– What comes to mind when you think of a credit card? If you're
like most people, you probably think about VISA or MasterCard. If you
carry one of these cards, you can charge goods or services anywhere
the VISA or MasterCard logo is displayed.

But did you know that your credit card was not issued
directly from the VISA or MasterCard company? VISA and MasterCard
credit cards, also known as bankcards, are issued by financial
institutions and banks that are affiliated with these organizations.
VISA and
MasterCard
are actually organizations that provide credit authorization systems,
processing services, and operating guidelines to the issuing
financial institutions or banks.

Two other major credit card names are American
Express and Discover.
The American Express card was originally a charge card (see the
explanation below for the difference between charge cards and credit
cards) but the company made revolving credit cards available in 1987.
The Discover card is another major credit card issuer, started by
Sears in 1985, but now a separate company.

Private label card – This is just a
fancy way of referring to a department store card or gas company
card. Retailers such as JC Penney's, Sears, and Exxon issue this type
of card for use at their locations.

Affinity card –
This type of credit card is offered by a bank and another sponsoring
organization, often a charity group or other non-profit. The
sponsor's name or logo is often placed on the card. The bank
typically gives a portion of your annual fee and purchases to the
sponsor. An example of an affinity card is one that lists your
college or perhaps AARP
(American Association of Retired Persons) as a sponsor. You may be
entitled to discounts or special deals from the sponsoring
organization.

Co-branded card – Similar to an affinity
card, this type of credit card is offered jointly by a bank and a
retail organization. The names and logos of both companies are
displayed on the card. Typically, you receive points or rebates based
on your spending levels. The points or rebates are redeemable for
specific goods or services, such as frequent flier miles, meals at
restaurants, Internet banking fees, and electronics, to name a few.
It's not uncommon for the points or rebates to have an expiration
date. Make sure the card you choose meets your needs. You should
evaluate not only the terms, but the incentives as well.

Home Equity Line of Credit – You can get
a credit card that is tied to the equity in your home. Although
interest rates may be lower, these credit cards have some big risks
for you if you fail to make payments — namely, losing your home
through foreclosure. See the U.S. Federal Deposit Insurance
Corporation article about home
equity credit.

Charge Cards

A charge card is similar to a credit card, but it is
generally used for purchases during a single billing cycle. Unlike a
credit card, a charge card doesn't offer you a revolving line of
credit, and you must pay the balance in full each month. Some
examples of charge cards are American
Express and Diner's
Club.

The Color of Plastic Money

Issuing banks want to be sure you have the ability to
pay back the money you borrow. They market credit cards in “flavors”
that are precious metals. Depending on your situation, you may be
eligible for:

Standard card
– This is the basic credit card. It generally has a credit
limit of $1,000 to $3,000.

Gold card – This card usually
offers a credit limit of $5,000 or more. Gold cards also offer perks
or incentives to cardholders, such as emergency assistance services
while traveling and extended warranties on purchased items.

Platinum and Titanium cards – These
cards generally have credit limits ranging from $10,000 to $30,000.
They come with special benefits, such as concierge service or access
to an airport club while you are waiting for your flight.

Debit Cards

A debit card may have a VISA or MasterCard logo, but
that doesn't mean it's a credit card. A debit card (also known as a
check card) is linked directly to your checking or savings account.
Money is withdrawn from your account when you make a purchase, so
it's more like a check than a credit card. A debit card can either be
used online or offline.

Online debit card
– With this type of transaction, money is deducted from your
account immediately. It works like an ATM card, so you'll need a PIN
(personal identification number). Frequently you are charged a fee
by your bank for making an online debit. Although online debits are
cheaper for the retailer where you make your purchases (for example,
Wal-Mart), the bank makes more money from offline transactions, and
tries to encourage the consumer to choose offline debits. Your fee
can range from $0.25 to as much as $3 for each online debit
transaction. Before using your debit card with a PIN, make sure you
know how much your bank is charging you to pay for your purchase
online.

Offline debit card – This type of
transaction is available with check cards that have the VISA or
MasterCard logo and can be done anywhere bankcards are accepted. The
money isn't deducted from your account immediately; it usually takes
2 to 3 days. No PIN is necessary, but you'll have to sign a receipt.

Identify theft is another point to consider when
deciding how to use your debit card. If a thief uses your debit card
offline, like a regular credit card, you are protected by law for a
maximum liability of $50 of unauthorized charges. But if a thief
steals your PIN number and makes online debit transactions, you can
lose all the money in the account tied to that debit card. See the
Consumer Action article about fraud
protections for debit cards. For more information about using
debit cards, see the article Are
You Riding the Debit Card Wave?

There are many ways for banks and retailers to offer
you credit. This article has focused on unsecured credit cards.
Depending on your current situation, however, a secured credit card
may better suit your circumstances. To learn more about secured
credit cards, read the related articles
in our Knowledge Center Library.